Corporate obligations should reflect stakeholders' best interests

In recent years, the language of business life has become increasingly replete with phrases such as ‘corporate responsibility’, ‘business ethics’, ‘ethical investment’ and ‘the triple bottom line’. The implication is that corporations have somehow lost sight of their ‘wider obligations’.

These developments may do much damage to the capacity of corporations to deliver shareholder value and, perhaps more significantly, may encourage corporate leaders to involve their organisations in activities that corporations are simply not designed to perform.

At the heart of any clear understanding of how corporations are governed is the Aristotelian notion that institutions should be primarily understood in terms of their purpose; that is, the telos that constitutes their fundamental aim. This forces us to recognise that business corporations are not athletic associations or even social welfare organisations, and that a horseriding club does not exist primarily to make a profit.

Each organisation has its own special task to perform, and should be wary of allowing itself to be excessively diverted from its commitments. A trade union, for example, that becomes totally focused on political activity to the extent that it gradually becomes an explicitly political movement will cease to serve its members’ everyday interests and needs except in an indirect and detached way.

The same observation may be applied to corporations. Some may choose to engage in what are at face value non-commercial activities. But once a business corporation loses sight of its corporate objective, or forgets that its primary responsibility is maximisation of shareholder value, then it has effectively betrayed its telos.

This commitment to maximising shareholder value is not of course a mandate for, say, wanton ecological destruction. It does, however, mean that shareholder value must be the priority for directors, managers and other employees. To do otherwise would be to betray the primary responsibility with which they have been entrusted.

Many would disagree with this description of corporations. Prominent among these are advocates of various versions of what are popularly known as ‘stakeholder’ theories of corporate governance.

As a word, ‘stakeholder’ reflects an unsubtle play on the word ‘stockholder’—the implication being that it confers an entitlement not dissimilar to that of ownership. But what does it mean to take account of the interest of stakeholders?

Corporations should be aware that an ‘interest’, even if legitimate, is not necessarily a stake. Even people affected by a corporation’s activities do not necessarily have a stake in them. Simply being offended by a practice, for example, is hardly sufficient to make an individual, group, or even society qualify as a stakeholder.

Stakeholder theory subtly undermines private ownership. Property, derived from the Latin proprietas, means (in the juridical-ethical sense of the word) the dominion that a person may exercise over a certain object possessed. Yet some stakeholder theorists argue that the assets utilised by corporations should be used for the balanced benefits of all stakeholders.

Immediately, one observes that the ‘dominion’ that shareholders enjoy over the corporation is arbitrarily diluted in this stakeholder scenario. A concept that is, at least ostensibly, concerned with producing a situation of fairness, actually disadvantages those who have chosen to undertake risks that others have not.

To this extent, stakeholder theory may actually undermine the process of issuing shares as a means of financing the corporation’s growth and new entrepreneurial ventures. For why would potential shareholders invest, if they knew that their interests would be subordinated again and again to those who had made no financial investment?

Lenders would also have less expectation of receiving an adequate return on investment. Stakeholderism is thus likely to produce poorer, static, risk-averse corporations and hence a poorer, static, risk-averse economy. If this is true, then stakeholder theory may actually serve purposes that are contrary to the interests of the very stakeholders that it purports to help.

The emergence of stakeholder theory illustrates that boards of directors as well as executives must have some consciousness of the direction and character of public policy debates. This will require a more active engagement with the world of ideas on the part of corporate leaders, not least because the promotion of stakeholder notions such as ‘corporate social responsibility’ and ‘ethical investment’ has spawned an unprecedented debate about ethics and corporate life.

Yet when it comes to developing a sound moral ecology within corporations, there is no substitute for abiding by long-established conventions, observance of the rule of law, and an enhancing of understanding of nature of ethics.

While this is a somewhat humbler (and far less politicised) path than many propositions advanced by some stakeholder theorists, it is a way that takes the moral life more seriously, precisely because it focuses upon the only moral agent there is: the individual human person.

The plausible and ordinary moral duties that one expects people working in corporations to recognise, such as honesty and fair dealing, flow from ordinary morality rather that a unique ‘business ethics’.

Such ordinary obligations are crucial, indeed essential, to the functioning of corporations and market economies. Where they do not exist, one either has to resort to the clumsy tool of regulation or helplessly watch as Mafia-like/crony-capitalist arrangements begin to prevail. If market and corporate relations are to endure, there must be some degree of moral consensus about our obligations.

There will, of course, be those directors, managers, employees and owners of corporations who shirk the responsibility of trying to live the moral life in their business activities. Here we inevitably rely upon the law, social conventions, and other devices to deter them. Such deterrence does not always work, and some individuals working in corporations will engage in immoral activity that may or may not be discovered and punished.

But to an extent, this is one of the prices of living in a free society. The alternative is to introduce stringent controls that unduly hamper the initiative and entrepreneurship required in corporations, not to mention undermine the scope for the free choice that is an essential prerequisite for a person’s actualisation of moral good.